You have been hired as a management trainee by Cravat Sales Company, a nationwide distributor of designer silk ties. The company has an exclusive franchise on the distribution of the ties, and sales have grown so rapidly over the last few years that it has become necessary to add new members to the management team. You have been given responsibility for all planning and budgeting. Your first assignment is to prepare a master budget for the next three months, starting April 1. You are anxious to make favorable impression on the President and have assembled the information below.

The company desires a minimum ending cash balance each month of $10,000. The ties are sold to retailers for $8 each. Recent and forecasted sales in units are as follows:

January (actual)................. 20,000 June....................... 60,000

February (actual)............... 24,000 July........................ 40,000

March (actual)................... 28,000 August.................... 36,000

April ................................. 35,000 September............... 32,000

May .................................. 45,000

The large buildup in sales before and during June is due to Fathers Day. Ending inventories are to equal 90% of the next months sales in units. The ties cost the company $5 each. Purchases are paid for as follows: 50% in the month of purchase and the remaining 50% in the following month. All sales are on credit, with no discounts, and payable within 15 days. The company has found, however, that only 25% of a months sales are collected by month-end. An additional 50% is collected in the following month, and the remaining 25% is collected in the second month following sale. Bad debts have been negligible.

The companys monthly operating expenses are given below:

Variable:

Sales commissions........................... $1 per tie

Fixed:

Wages and salaries............................ $22,000

Utilities ............................................. $14,000

Insurance .......................................... $1,200

Depreciation...................................... $1,500

Miscellaneous.................................... $3,000

All operating expenses are paid during the month, in cash, with the exception of depreciation and insurance expired. Equipment will be purchased during May for $25,000 cash. The company declares dividends of $12,000 each quarter, payable in the first month of the following quarter. The companys balance sheet at March 31 is given on the next page.

Assets

Cash..............................................................................$14,000

Accounts receivable ($48,000 February sales;

$168,000 March sales)................................................$216,000

Inventory (31,500 units)..............................................$157,500

Prepaid Insurance.........................................................$14,400

Fixed assets, net of depreciation.................................$172,700

________

Total assets.................................................................. $574,600

Liabilities and Stockholders Equity

Accounts payable........................................................$85,750

Dividends payable...................................................... $12,000

Capital stock...............................................................$300,000

Retained Earnings.......................................................$176,850

________

Total liabilities and stockholders equity....................$574,600

The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month, and for simplicity, we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $10,000 in cash.

Required:

Using Excel, prepare a master budget for the three-month period ending June 30. Show the budget for each month and the quarter. Include the following detailed budgets:

A sales budget

A schedule of expected cash collections from salesA merchandise purchases budget in units and in dollars

A schedule of expected cash disbursements for merchandise purchases

A cash budget

A budgeted income statement for the three-month period ending June 30. Use the contribution-margin approach.

A budgeted balance sheet as of June 30.

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